Introduction

The United States (US) Foreign Account Tax Compliance Act (FATCA) initiative came into effect in New Zealand on 1 July 2014. FATCA is not, in fact, a separate Act, but a reference to Chapter 4 of the US Internal Revenue Code, which was enacted by the US Congress on 18 March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Little attention was paid to FATCA in New Zealand until it became clear that FATCA was unlikely to be repealed (despite a global outcry), and New Zealand (along with other countries) announced that it would recognise FATCA, and that FATCA would be incorporated into New Zealand's domestic law.

FATCA is, at heart, an information collection measure enforced by a draconian 30% withholding obligation on most US payers. It has raised significant sovereignty, privacy and compliance cost concerns, and FATCA (and similar initiatives involving other jurisdictions, most notably the collection of taxpayer details under the common reporting standard (CRS) and the automatic exchange of information (AEOI) between countries) will affect taxpayers globally, and will require solicitors in private practice in New Zealand to undertake new information-gathering and compliance roles.

The origin of FATCA lies in part in the unique character of the US tax system: the US taxes all of its citizens on their worldwide income, regardless of whether or not they are actually resident in the US. The effect is that once a person is in the US tax net by virtue of being “American”, it is not possible to get out, unless that person formally renounces their citizenship. FATCA is designed to “expose” US taxpayers who may be hiding overseas in other jurisdictions (or hiding their financial assets overseas) and so evading US tax. This problem is of course not unique to the US, but affects the US particularly acutely, due to its global “hold” on its citizens and certain features of its international tax regime, which discourage the repatriation of funds sitting outside the US.

The effect of FATCA is to increase compliance with US tax filing and payment requirements by imposing elements of US tax law upon the world and effectively outsourcing information collection to foreign revenue authorities and taxpayers. Enforcement is facilitated by the fact that the US is the world's most significant financial clearing house. The choices are stark. Financial Institutions (FIs) outside the US (referred to in FATCA and related legislation and regulations as “Foreign Financial Institutions” or “FFIs”) can either comply with FATCA, or be subject to 30% withholding on many payments made to them by or through financial institutions in the US, and other persons subject to US law. There has been extensive criticism of FATCA, including that it is highly intrusive on the privacy of entities and individuals, inflicts high compliance costs on taxpayers and revenue authorities in other countries for the benefit of the US Government, and undermines the sovereignty of other states by interfering with their domestic law. However, in a climate where tax base erosion is extremely topical and, as discussed below, the OECD is leading the charge towards ever-greater tax information-sharing between countries, FATCA (or something like it) is probably here to stay, and accordingly New Zealand law firms, businesses and individuals must turn their attention from complaint to compliance.

Contents outline

Introduction to FATCA

Key terms and concepts

Impact of FATCA on law firms, law firms' trust accounts and lawyers' nominee companies

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